Can a homeowner who loses his home to foreclosure, after filing four separate bankruptcy petitions, prevail on a legal malpractice claim against his bankruptcy attorney and recoup the remaining equity in the home as damages? This Court not only finds the claim to viable but, based upon this record, holds that a substantial award of damages is appropriate.

The above entitled action was tried before the Court as a non-jury trial on October 27, 28 and December 14, 2009. Prior to the commencement of the trial, the parties agreed to stipulate as to the fair market value of the premises as of April 4, 2002, that is, $870,000. Post-trial memoranda of law were submitted on December 21, 2009. At the conclusion of the trial, the Court decided to render a written decision, in keeping with CPLR 4213, in order to more fully set forth its findings of fact and conclusions of law.

The Court was called upon to judge the credibility of the witnesses who testified and the Court's determination in assessing the evidence is entitled to deference (see Northern Westchester Professional Park Assocs. v Town of Bedford, 60 NY2d 492, 470 NYS2d 350 [*2][1983]). A trial court's determination will not be disturbed unless its conclusions could not be reached under a fair interpretation of the evidence (see BGW Dev. Corp. v Mount Kisco Lodge No. 1552, 247 AD2d 565, 567, 669 NYS2d 56 [2d Dept 1998]). In this case, the resolution of various issues turned upon questions of credibility. The Second Department has repeatedly held that credibility is a matter within the trial court's special competence (see Healy v Williams, 30 AD3d 466, 818 NYS2d 121 [2d Dept 2006]; Fisher v Fisher, 87 AD2d 808, 448 NYS2d 781 [2d Dept 1982]; Kurtish v Iskokovic, 204 AD2d 847, 612 NYS2d 263 [2d Dept 1994]). What follows is a summary of the testimony that influenced the Court.

The plaintiff and his non-party wife, Reiko Mizuno, purchased the premises located at 5 Gerry Lane, Lloyd Neck, NY on February 22, 1993 (Def. Ex. S), as tenants by the entirety. Both names appear on the mortgage and note (Def. Exs. R and T). Mr. Mizuno holds a PhD in Mathematics and does work for various banking institutions. He started his own business in 1993 and immediately began to experience cash-flow problems. He stated that payment for his services was often delayed. By March 1, 1994, plaintiff had defaulted on a mortgage payment, leading to the filing of the underlying foreclosure action on August 2, 1994 (Def. Ex. T). In 1995 he was forced to file his first bankruptcy petition to stay that foreclosure and hired a bankruptcy attorney, Joseph J. Fontanetta for that purpose. That proceeding was eventually dismissed for lack of payment to the Bankruptcy Trustee. In 1998 a new petition was filed in order to protect the home, which also was eventually dismissed.

When difficulties arose again, plaintiff was referred to the defendant law firm in 1999 to file a new petition and a retainer was signed on August 17, 1999 (Pl. Ex. 1). The petition was filed on September 14, 1999 (Def. Ex A). The defendant's associate at that time, Lawrence S. Lefkowitz, Esq., was assigned to handled the file. The foreclosing bank's application for relief from the automatic stay was heard on April 17, 2000 before the Hon. Melanie L. Cyganowski, who, as the transcript discloses (Def. Ex. G) directed the submission of a Conditional Order providing for a two-month default period before a default notice could be sent out. If not cured, the order would be with prejudice, the stay would be lifted, and the homeowners would not be able to file another bankruptcy petition for 180 days ("given the with prejudice relief' that I am prepared to enter, we will give him as much as 60 days to stay current with the obligation") (id. at p 6). It was noted that payments were due under the mortgage on the first of the month (id. at p 5).

The Conditional Order, which was prepared and submitted by the bank's attorney, was signed by the Bankruptcy Judge on May 1, 2000 (Pl. Ex. 5). It contained the following directions:

B.ORDERED that, Debtor shall make current monthly payments ... by the 15th day of each and every month in which due, commencing with the May 2000 post petition mortgage payment.

C.ORDERED that, in the event the debtor fails to ... make payments described in paragraph B hereinabove after a 60 (sixty) day period, and thereafter fails to comply with a Ten (10) Day [*3]Notice to Cure with applicable late charges and legal fees of $25.00, then upon the filing of an Affidavit of Non-compliance, the automatic stay shall be immediately vacated ... to the extent necessary to ... foreclose on the mortgage ... without further application of the Court...

The cover letter from the defendant's law firm, noted that [b]y terms of the Order, you will also be prohibited from filing bankruptcy to stop the foreclosure for 180 days"(id.). Plaintiff testified that the Conditional Order was never explained to him and that it was his understanding that he could not be behind more than two months on his payments. Notices to Cure were sent on July 6, 2000 (Def. Ex. B) and October 26, 2000 (Def. Ex. D), but payments were eventually made.

The instant controversy begins with the Notice to Cure dated December 28, 2001 (Def. Ex. H). The notice is internally inconsistent in that it states "[p]ursuant to ... the Order, the Debtor was to make the regular monthly payment by the 15th day of each and every month in which due" but then notes the default as "2 PAYMENTS (11/01 - 12/01)." Upon receipt of the Notice to Cure, plaintiff went to his bank on January 10, 2002 and obtained a bank check to tender to the foreclosing bank's attorney the sum due for November 2001, plus the late fee. A copy of that check is attached to Def. Ex. I and was delivered on or before January 15, 2002. The foreclosing bank's attorney refused to accept the payment and returned it to the defendant, by letter dated January 25, 2002 (Def. Ex. I). It was the foreclosing bank's position that both outstanding months had to be paid to bring the debt current.

That same day, the foreclosing bank's attorney prepared an Affidavit of Non-Compliance and filed it with the Bankruptcy Court, in keeping with the May 1, 2000 Order (Pl. Ex. 3). The Affidavit of Non-Compliance expressly noted that payments had to be made "by the 15th day of each and every month, commencing with the May 2000 payment." The Affidavit was forwarded to the plaintiff by the defendant by cover letter dated February 7, 2002, with the following advise, "[y]our best alternative is to file another Chapter 13 case" (id.). Plaintiff testified that he had a telephone conversation with defendant's associate and was informed that their plan was to file a new petition. He was also advised to stop making payments to the Chapter 13 Trustee. Plaintiff also testified that he was unaware of the provision in the May 1, 2000 conditional order that stopped future filings of new petitions.

With the foreclosure sale set for April 4, 2002, a new retainer was signed on March 7, 2002, (Pl. Ex. 1), and a check was provided for $2,685.00 (Pl. Ex. 2) to cover legal fees and expenses for the new petition. By letter dated March 18, 2002, the defendant law firm insisted that plaintiff come into the office to sign the petition, with the following advise:

As you already know the foreclosure sale of your home is scheduled for April 4, 2002. Please be advised that until such time as a petition is filed with the Court you will be afforded no protection from foreclosure by the Court so please be sure to comply.

Plaintiff complied and on April 3, 2002 the new petition was filed by defendant (Def. Ex. [*4]K). The day before, the foreclosing bank's attorney issued a pay-off letter, dated April 2, 2002, which stated that the total amount due was $591,372.44 (Pl. Ex. 9). Based on the Conditional Order's preclusion of new petition filings, the foreclosure sale went forward on April 4, 2002. The referee's report of sale notes that the premises was sold for $629,000 and that a deficiency of over $29,000 existed (Def. Ex. U).

After the foreclosure sale, plaintiff hired his original bankruptcy attorney, Joseph J. Fontanetta, to seek to set aside the sale and a new retainer was signed (Pl. Ex. 11). By Order dated July 9, 2002 (Pl. Ex. 7), the Bankruptcy Judge denied the request to reopen the case based upon the failure to make payments to the Chapter 13 Trustee under the old petition and only partial payments under the new petition. The Court, while recognizing plaintiff's argument as to the foreclosing bank's premature filing of the notice of default, "decline[d] to speculate why the Debtor did not seek this relief sooner" and found that "it is too late now to correct the error' made in December 2001, even assuming that the bank was in error" (id.).

Based upon the advise of his new counsel, plaintiff forwarded $6,585.00 to the Chapter 13 Trustee by check dated July 11, 2002 (Pl. Ex. 10). An appeal was taken to U.S. District Judge Joanna Seybert from the July 9, 2002 Order of the Bankruptcy Judge. That appeal was denied by order dated April 9, 2003 based upon a late filing of the brief and a failure to object sooner (Pl. Ex. 17) In all, plaintiff claims to have paid $22,755.10 in legal bills after the foreclosure sale to his new counsel (Pl. Exs. 12 and 13). Additionally, plaintiff paid $250 (Pl. Ex. 14) and $1,483.00 (Pl. Ex. 15) for legal advise from other attorneys. As noted above, plaintiff paid $2,685.00 to defendant for the filing of the new petition.

In order to prevail in an action to recover damages for legal malpractice, a plaintiff must establish both that the defendant attorney failed to exercise the ordinary reasonable skill and knowledge commonly possessed by a member of the legal profession, resulting in actual damages to the plaintiff, and that "but for" the attorney's negligence, the plaintiff would have succeeded on the merits in the underlying action or not have sustained any damages (Dupree v Voorhees, _ AD3d _ , 2009 WL 4681166 [2d Dept Dec. 8, 2009]; Ali v Fink, 67 AD3d 935, _ NYS2d _ [2d Dept 2009]; Santiago v Fellows, Epstein & Hymowitz, P.C., 66 AD3d 758, 886 NYS2d 766 [2d Dept 2009]).

Here, it is obvious, from the testimony of defendant's associate, that the provision in the Conditional Order which held that a default would not be protected by the filing of a new petition, was simply forgotten. The legal advise to commence a new bankruptcy proceeding was contrary to the dictates of the May 1, 2000 order and offered no protection to plaintiff, in response to the foreclosing bank's claim that plaintiff was in default of the Conditional Order. Moreover, the defendant's law office just assumed that plaintiff had not complied with the Conditional Order and accepted the representations made by the foreclosing bank's attorney.

It is clear from the Conditional Order, which was prepared by the bank's attorney, and even from the wording of the Notice to Cure, dated December 28, 2001, and the Affidavit of [*5]Non-Compliance, dated January 25, 2002, that payments could be made "by the 15th day of each and every month, commencing with the May 2000 payment." In light of that crucial fact, which was easily discoverable upon review of the Conditional Order, plaintiff possessed a valid defense to the premature notice to cure. Yet, instead of raising an objection with the bank's attorney or the Bankruptcy Judge, defendant's office simply decided to do the one thing that it was prevented from doing, that is, filing a new petition. In light of all of the above, the Court finds that representation provided by defendant's office deviated from the ordinary reasonable skill and knowledge commonly possessed by a member of the legal profession.

The Court rejects defendant's argument regarding the lack of power of the Bankruptcy Court to modify the mortgage by changing the due date of same, since it is undisputed that the foreclosing bank's attorney was the one who prepared and submitted the Conditional Order to the Bankruptcy Judge for signature and thereby consented to the modification of the due date to the 15th of each month. Such is reflected in each Notice to Cure submitted to the Court and the Affidavit of Non-Compliance, all prepared by the bank's counsel. While the transcript of April 17, 2000 does not reflect a judicial direction in that regard, the Conditional Order is controlling and its language was never challenged by the bank's attorney.

Therefore, when plaintiff submitted the mortgage payment on or before January 15, 2002, it was timely and it is equally clear that the December 15, 2001 payment was not due until February 15, 2002. Defendant's claim that a debtor may not cure a mortgage default by tendering a partial payment is misplaced, under the circumstances of this case. The bank was not justified in rejecting the payment offered to cure the default and defendant failed to object to the premature actions of the foreclosing bank. The Court does not find the testimony offered by defendant's expert, the foreclosing bank's counsel, to be credible on the claim that the 60 day period set forth in paragraph C. of the Conditional Order began to run on the first of the month. As set forth above, paragraph C. references paragraph B., which requires payment by the 15th of each month.

Therefore, no issue exists as to whether the Bankruptcy Judge violated Bankruptcy Code §1322(b)(2) by modifying a mortgage in a Chapter 13 Case. The record reflects that the bank's counsel acquiesced to the payment due date of the Conditional Order, notwithstanding her testimony of actual intent at the trial of this action. In any event, while §1322(b)(2) does not permit the debtor's plan to unilaterally modify the rights of holders of a security interest in real property, nothing prevents the parties from agreeing to a modification.

With regard to the element of causation, plaintiff has to show that he would not have incurred any damages but for the attorney's negligence. Defendant attempted to show that plaintiff did not have the ability to pay the monthly mortgage payments and offered plaintiff's tax returns for the 1998 (Def. Ex. P), 1999 (Def. Ex. Q), 2000 (Def. Ex. L), 2001 (Def. Ex. M), and 2002 (Def. Ex. O) as evidence of plaintiff's inability to pay. Plaintiff offered bank account statements from December 2001 to April 2002 (Pl. Ex. 8) to demonstrate the ability to pay the monthly payments. Plaintiff also testified that for the year, 2002, the month of July was the only [*6]month that he would have had difficulty making the required payments.

In deciding the issue of causation, the Court need not speculate as to the financial ability of the plaintiff to pay into the future. The sole issue to be determined is whether "but for" the negligence of the defendant, plaintiff would not have lost his home to foreclosure. Here, plaintiff satisfied his burden by the submission of evidence that he could comply with the Conditional Order during the time frame in question, that is, satisfaction of the November 15, 2001 payment by January 15, 2002 and each monthly payment thereafter up to the foreclosure sale date of April 4, 2002. Such evidence satisfied plaintiff's obligation to establish causation.

Having found for the plaintiff on the issue of liability, the Court must address the issue of damages. The object of awarding damages in a legal malpractice action is "to make the injured client whole" (Campagnola v Mulholland Minion & Roe, 76 NY2d 38, 42, 556 NYS2d 239 [1990]). Compensatory damages are generally awarded where a plaintiff can demonstrate that he or she suffered any actual damages (see Rudolf v Shayne, Dachs, Stanisci, Corker & Sauer, 31 AD3d 418, 818 NYS2d 153 [2d Dept 2006]).

On the last day of the trial, defendant submitted a memorandum of law seeking to limit plaintiff's damages to one-half of any lost equity in the premises based upon the fact that the plaintiff's wife did not file for bankruptcy and was not a client of the defendant law firm. Defendant supports its claim with citation to various cases involving voluntary sales of properties subject to tax liens, or the distribution of fire insurance proceeds or surplus monies after a foreclosure sale. It is defendant's position that once the home was sold in foreclosure, the form of ownership of the claim for lost equity was converted from a tenancy by the entirety into a tenancy in common, thereby limiting plaintiff's recovery to one-half the lost equity.

The Court is concerned that such a claim, which appears to challenge the capacity of the plaintiff to seek the full measure of damages is one "likely to take the adverse party by surprise or would raise issues of fact not appearing on the face of a prior pleading" (CPLR 3018[b]), requiring the pleading of an affirmative defense (see Wells Fargo Bank Minn., NA v Mastropaolo, 42 AD3d 239, 242, 837 NYS2d 247, 250 [2d Dept 2003]).

In any event, while the Court is in general agreement with the holding of then Justice John F. Scileppi in Mojeski v Siegmann, 87 Misc 2d 690, 386 NYS2d 609 (Sup Ct Suffolk County 1976), which was affirmed by the Second Department (see 57 AD2d 549, 393 NYS2d 1021 [2d Dept 1977]), and held that a surplus money fund created by a foreclosure sale of real property is personalty, and not realty, such is not the situation before this Court. Here, there was no surplus money from the foreclosure sale, instead there was a deficiency. But more importantly, unlike a situation where a party affirmatively defaults on a mortgage and pursuant to the contract of mortgage a foreclosure sale is held and surplus monies are realized, here "but for" the negligence of the defendant, the plaintiff lost that which he was entitled to, his tenancy by the entirety. [*7]

In this legal malpractice case, while the measure of damages is the full equity value of the premises lost to the foreclosure, what was lost by the plaintiff, through no fault of his own, was his tenancy by the entirety in the subject premises. In order "to make the injured client whole," this Court will award plaintiff the full measure of damages occasioned by the negligence of the defendant.

The parties have agreed that the fair market value of the premises on April 2, 2002 was $870,000. The Court agrees that $583,655.57 representing principal, interest, escrow advance, and late charges (Pl. Ex. 9) should be used as a credit for the defendant. Defendant seeks to utilize the sale price of $629,000, which included customary expenses of a foreclosure sale, however those additional fees were incurred as a result of the negligence of the defendant. Whatever additional costs and expenses that were recouped by the foreclosing bank do not constitute damages or expenses incurred by plaintiff.

Additionally, plaintiff made an additional payment to the foreclosing bank on July 11, 2002 in the sum of $6,585.00 (Pl. Ex. 10), which reduced the final balance owed to the bank to $577,070.57. Therefore, the loss in equity equals $292,929.43. Under the facts of this case, plaintiff is entitled to consequential damages, which are recoverable in legal malpractice actions under appropriate circumstances (see Rudolf v Shayne, Dachs, Stanisci, Corker & Sauer, 31 AD3d 418, , supra ). Plaintiff is entitled to recover legal fees of $22,755.10 incurred after the foreclosure sale, which he paid to his new counsel (Pl. Exs. 12 and 13), a sum which was not contested by defendant. Additionally, plaintiff paid and can recover $250.00 (Pl. Ex. 14) and $1,483.00 (Pl. Ex. 15) for legal advise from other attorneys. As for the legal fees of $2,685.00 paid to defendant for the filing the new petition, since $1,875.00 was transferred to the new counsel, the net amount paid and to be credited to plaintiff is $810.00. The total sum of damages is $318,227.53.

Finally, while all parties agree that interest is allowable in legal malpractice cases, the date of accrual is disputed. Since legal fees were being billed on September 8, 2003 (Pl. Ex. 12) and paid as late as August 15, 2005 (Pl. Ex. 13), the Court determines that interest at the legal rate of interest shall run from May 1, 2003, which represents a single reasonable intermediate date (see CPLR 5001[b]). The Court rejects defendant's request for credit for one year of rent for that period of time plaintiff fought the eviction, since it no longer owned the premises after the foreclosure sale and no pleading is set forth seeking such relief, which could have been obtainable as part of the eviction proceeding.

This constitute the decision of the Court. Submit judgment on notice.